Are Sunk Costs a Barrier to Entry?

20 Pages Posted: 19 May 2008

See all articles by Luis M. B. Cabral

Luis M. B. Cabral

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics; Centre for Economic Policy Research (CEPR)

Thomas W. Ross

University of British Columbia (UBC) - Sauder School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 2007

Abstract

The received wisdom is that sunk costs create a barrier to entry - if entry fails, then the entrant, unable to recover sunk costs, incurs greater losses. In a strategic context where an incumbent may prey on the entrant, sunk entry costs have a countervailing effect: they may effectively commit the entrant to stay in the market. By providing the entrant with commitment power, sunk investments may soften the reactions of incumbents. The net effect may imply that entry is more profitable when sunk costs are greater.

Keywords: Barriers to entry, sunk costs

JEL Classification: L13

Suggested Citation

Cabral, Luis M. B. and Ross, Thomas, Are Sunk Costs a Barrier to Entry? (March 2007). CEPR Discussion Paper No. DP6162. Available at SSRN: https://ssrn.com/abstract=1133806

Luis M. B. Cabral (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Thomas Ross

University of British Columbia (UBC) - Sauder School of Business ( email )

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